Our £450k second home is our teenage sons' inheritance - can we gift it to them over a decade?

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My wife and I are in our mid-50s and currently have two houses, the main house we live in and the other an older relative is living in rent free. 

We have two teenagers and we are looking to sell the second house to help them in the future. 

We want to sell this house and give them all or most of the money in 10-15 years' time. The house is currently worth £450,000.

Is it possible, rather than give them £3,000 each per year, to give them the equivalent as a percentage of the house per year. 

They will probably still be living with us for a good 10-15 years before moving out. 

The idea is that we then sell the second house and split the money between them, but still have the main house to hand down on our deaths, the current value of our main house is £1.2million. 

W.J., via email

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Passing on: This reader's total estate could incur a substantial tax bill if they don't take action to mitigate IHT liability

Harvey Dorset, of This Is Money, replies: It is understandable you are keen to find a way to pass on as much of your estate as possible to your two children in an efficient way.

In your case especially, with your main home worth over £1.2million and the second property worth £450,000, your estate will be well over the tax free £1,000,000 limit accessible to couples via their combined nil rate bands and residence nil rate bands.

That's before accounting for any other cash, assets and investments that you may have. 

With inheritance tax charged at 40 per cent over the NRB and RNRB, you and your loved ones could be in for a hefty tax bill further down the line.

This own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold. It vanishes completely by £2.3million.

As a result of this, your inheritance tax bill could be even larger if your estate is affected by this taper.

As mentioned by financial planner Neil Rushton, below, the practicalities of gradually gifting the second home to your sons within your yearly allowances could prove more hassle than it is worth.

As a result, you should consider alternative methods of passing on this wealth. This could include making the most of trusts and the seven-year gifting rule in order to pass on this property without incurring a large tax bill.

This Is Money spoke to two financial advisers to find out what you need to consider before passing this property onto your sons.

Inconvenience: Neil Rushton says this reader would need regular property valuations if gifting out of equity

Neil Rushton, chartered financial planner at Old Mill, replies: In a nutshell, while this may be theoretically possible under the right circumstances, it may be difficult and costly to achieve in practice.

Directly gifting assets to your children, such as property, during your lifetime can be a great way of reducing the inheritance tax liability (IHT) against your estate.

If you gift the house outright in one go and survive for seven years, you will escape paying IHT on it, otherwise the gift will be taxable at 40 per cent.

Gifts up to £3,000 per annum each are not subject to the seven-year rule.

Gifting a percentage of your property (equivalent to £3,000 each per year) would remove some of the property from your estate sooner.

However, transferring a property is a complex process and doing so in multiple stages is likely to increase the associated costs and burden of administration.

Each annual gift may result in a capital gains tax liability, up to 24 per cent. Tax on these gains spread over a longer period, may produce a more tax efficient outcome. The extra cost of a conveyancing solicitor and/or tax adviser to help with the reporting would reduce the tax saving.

In addition, there is the inconvenience of needing to obtain regular market valuations.

Children under the age of 18 cannot own land or property directly, so gifts to your children would have to be held in trust (if under 18).

Trusts arrangements can be complicated  - however, transferring the full value of the property into trust now (regardless of the children's ages) is likely to be less complex and possibly more cost effective than transferring small percentages each year.

Transferring the ownership of the property would also start the seven-year clock ticking.

Appointing yourselves as trustees would help to retain control over the timing of when the property is eventually transferred to the children, depending to the type of trust.

Future increases to the capital value of the property would be outside your estate for IHT and existing gains on the property can be held until the property is distributed to your children, potentially reducing CGT as your children may pay lower rates of tax, subject to their income and tax rules at the time.

Alternatively, instead of a trust you could simply wait 10-15 years to transfer the property to your children.

Although not addressing the IHT liability immediately, if you have more liquid assets (savings and investments) surplus to your own needs, these could be gifted each year, to utilise the £3,000 IHT allowance.

If you are concerned with death occurring during this period, you could take out a life insurance policy to cover the potential IHT against the gift.

Ultimately, any decision on gifting your property will involve carefully weighing up the potential tax charges and costs.

It's also important to consider the risks of things not going to plan, such as a change in tax rules, your circumstances or your children's and/or older relative's.

A lot can happen over the next 10-15 years, so I recommend consulting a professional financial planner who can help improve the chances of you achieving a successful outcome.

Trust benefits: Tom Miller says putting the property into trust could reduce the eventual CGT bill

Tom Miller, financial planner at Charles Stanley, replies: Gifting property to individuals under 18 involves specific legal and practical considerations, as minors cannot legally own property in their own name in the UK. 

Therefore, the property must be placed in a trust. There are two main types of trusts used for this purpose:

1. Bare Trust: A simple trust where the trustee holds assets on behalf of a beneficiary, who has the absolute right to the assets and any income generated from them. The beneficiary gains full control of the assets when they reach the age of 18.

2. Discretionary Trust: Allows trustees to decide how to distribute income and capital among the beneficiaries, providing flexibility based on the beneficiaries' needs and circumstances. 

Beneficiaries do not have a fixed right to the trust assets, relying instead on the trustees' discretion.

In the UK, you can give away up to £3,000 each year (per person) without it being added to the value of your estate for inheritance tax purposes. 

This is known as the annual exemption. If you want to gift the equivalent of £3,000 each per year, you would calculate what percentage of the house's value this represents. 

For instance, £3,000 is approximately 0.67 per cent of £450,000. You could then gift them 0.67 per cent of the house's value each year. 

Each year, you would need to determine the value of the percentage of the house you are gifting. 

This would require regular property valuations and proper documentation to ensure everything is legally binding and clear. 

This would be very complicated and perhaps more trouble than it is worth.

A gift of your second property is subject to capital gains tax (CGT), which is charged on any profit arising, or treated as arising, on the gift. HMRC treats it as if you sold it at its current market value, even if no money changes hands. 

You would need to consider each year the gain on each share that you are gifting. 

Each of you would then have an annual CGT exemption (£3,000 for the 2024/25 tax year) which this can be offset against. 

When figuring out the gain, you charge based on the difference between what the property is worth now and what you originally paid for it, minus any eligible costs.

Instead, there may be merit in gifting the whole property into trust now rather than selling and gifting the proceeds in 10-15 years' time. 

While you would potentially pay capital gains tax now, this could be less than in 10-15 years' time assuming house prices increase. 

In addition, gifting the property now may be beneficial and this would be classed as a Potentially Exempt Transfer (PET) if gifted into a bare trust. 

This is a gift made during your lifetime that becomes exempt from inheritance tax if you survive for seven years after making it. 

Making the gift now while you are younger statistically means you are more likely to live the seven years.

If you went down this avenue you would need to be sure that you did not need the second property. 

For example, do not think you would need rental income from it in the future. 

Consideration will also need to be given to your older relative. That is when the choice of trust is key.

While it is possible to gift a portion of the property annually, the process can be quite complex. 

Since the funds would be placed into a trust, additional administrative tasks would be necessary. 

Considering you plan to gift £3,000 to each of your children, this could become a costly and administratively burdensome exercise each year.